17 December 1996 External T.I. 9634985 - SELLING COSTS IF DISPOSITION IS ONLY DEEMED

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether outlays for reasonable selling and legal costs can be taken into account when there is a deemed disposition of property at fair market value

Position:

only if such costs are made or incurred. The determination of whether certain expenses are deductible or not relies upon whether such expenses have been made or incurred and not upon whether there is an actual or deemed disposition

Reasons:

		963498
XXXXXXXXXX	Sandra Short

December 17, 1996

Dear XXXXXXXXXX:

Re: Deemed Disposition of property at Fair Market Value

This is in reply to your letter of October 9, 1996, which asks whether reasonable selling costs and legal fees can be taken into account when there is a deemed disposition of property at fair market value.

In our telephone conversation of December 12, 1996 (XXXXXXXXXX/Short), you indicated that your client will have a deemed disposition of a rental property once the property commences to be used as a principal residence. No selling costs or legal costs are expected to result from the deemed disposition. However, in an actual sale transaction, the client would incur selling and legal expenses and would, as a result, be able deduct these amounts from proceeds of disposition. The expressed concern is that the client should be in the same position (have the same or approximately the same recapture amount, terminal loss, capital gain, loss) whether the property is actually sold or deemed to have been disposed.

Our Comments:

Reasonable outlays and expenses which are incurred in relation to the disposition of an asset may be taken into consideration when calculating any recapture, terminal loss, capital gain or capital loss. There are a number of situations in which an asset may be considered to have been disposed of for purposes of the Income Tax Act without an actual sale taking place, including cases when there is no change in the property's ownership. However, no deduction for selling or legal expenses may be made if no amount has in fact been made or incurred. This is true whether there is an actual or deemed disposition. Thus, the determination of whether certain expenses are deductible or not depends on whether such expenses have been made or incurred and not on whether there is an actual sale or deemed disposition.

The client may be able to elect, under subsection 45(3) of the Act, to postpone reporting the deemed disposition of the rental property until it is actually sold. No election may be made if the client, the client's spouse, or a trust under which the client or client's spouse is a beneficiary, has deducted capital cost allowance on the property for any taxation year after 1984, and on or before the day he changes its use. To make the election, the client should submit a signed letter which describes the property and states that an election under subsection 45(3) of the Act is being made. The election must be made by the earlier of:

(a)90 days after a demand by the Minister for the 45(3) election is sent and

(b)the date the client's tax return is due for the year in which the property is actually sold.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch